Mortgage Amortization: The Mathematics of Paying Off Your Property Years in Advance – Most people sign a 30- or 35-year mortgage and agree to make monthly payments on that debt until it is paid off.
What banks rarely explain clearly is the power of making extra payments. Paying only the monthly installment means covering mainly the interest for that period.
When you make an extra payment, the money goes directly toward the outstanding balance. This ignores the future interest that would accrue on that amount. The result is the elimination not only of days, but often of entire months from your debt with a single payment.
This article explains the exact steps you can take to save thousands of reais and obtain the permanent title deed much sooner than expected.
The Big Dilemma: Should You Shorten the Term or Reduce the Payment Amount?
When making a prepayment, the banking system offers two options: shorten the total term of the loan or reduce the monthly payment. Choosing the wrong option here could cost you the price of a popular car over the years.
Shorten the Deadline
This is the best choice, from a mathematical standpoint, for anyone who wants to save money. By shortening the term of the loan, you eliminate all interest charges that would have accrued during those months you’ve cut off.
It is common for a R$ 5,000.00 principal payment to eliminate R$ 15,000.00 or more in future debt, depending on the agreed-upon interest rate.
Reduce the Installment
This option reduces your immediate monthly payment but extends the term of the loan. Interest continues to accrue over the same long period (e.g., 360 months). Only choose this option if your monthly budget is extremely tight and there is a risk of default.
How It Works in Practice (SAC vs. Price Table)
The amortization schedule specified in the contract affects the pace of repayment. In Brazil, the SAC Schedule is the most common for residential properties. Under this schedule, the installments decrease because the principal is paid off at a constant rate. This benefits those who want to pay off their loan quickly, as the outstanding balance decreases steadily.
With the Price Plan, the payments are fixed. At first, most of what you pay is just interest. The outstanding balance decreases very slowly in the early years. For those on the Price Plan, making extra payments is even more crucial to breaking the momentum of compound interest.
The Role of the FGTS in the Strategy
The Severance Pay Guarantee Fund (FGTS) is a powerful ally. It yields very little (3% per year + TR), while financing it costs much more (usually over 8% or 9% per year). Using the FGTS to make payments is, therefore, a logical financial decision.
You can use your FGTS balance every 2 years to pay down the outstanding balance. This rule allows you to reduce your monthly payments by up to 80% for 12 months or pay off the entire balance. The strategy of paying down the outstanding balance by shortening the term typically yields the highest return on equity.
Step-by-Step Guide to Amortization
You don't need to go to a bank branch. Technology has made the process easier. Here's how to use the main apps:
- Access the app: Open your bank's mortgage app (Caixa Habitação, Itaú, Bradesco, etc.).
- Contracts Menu: Find your active contract.
- Amortize Option: Select “Amortization” and generate a payment slip for the amount you have available (it can be any amount above the minimum set by the bank).
- Select the Type: Select “Deadline Extension.”.
- Payment: Pay the bill and check your updated balance within 3 business days.
Precautions Before Making an Early Decision
Before putting all your capital into a home, check your emergency fund. Money invested in a home loses its immediate liquidity. You won't be able to access it in the event of unemployment or illness.
Keep 6 to 12 months' worth of your living expenses invested in fixed income with daily liquidity. Only the surplus should be used to accelerate repayment of the loan.
Frequently Asked Questions
Yes. Most banks allow you to generate individual payment slips at any time. Many borrowers pay the official installment and generate an additional payment slip for any amount on the same day.
It depends on the institution. Some banks accept any amount, while others require a minimum (e.g., R$ 50.00 or the amount of one installment). Check the rules in your bank's app.
Generally, yes. If the interest on your loan is lower than the return on fixed-income investments (which is rare in older contracts), it may be worth investing. However, for most recent contracts, the loan’s interest rate exceeds the net returns on conservative investments.
